Economics for Business and Management - Essay Example

A situation in which marginal cost is higher than marginal costs implies that further improvements can be for society and, thus, it is inefficient for society to prolong its situation at that level. On the other hand, when marginal costs are higher than marginal revenue, it means that there are wastages and society would do better if lowers output such that marginal costs are reduced to be just equal to marginal revenues. This is the market equilibrium and market equilibrium is interpreted as “efficient” because marginal costs are just equal to marginal returns.

Usually, the people who hold on to the view are economists, businesspersons, and pragmatic policy makers. However, economists who take this position qualify that for market to fulfil its role as efficient allocator of resources, certain conditions apply. For example, some of the conditions necessary conditions are believed to be as follow: 1. The good or service which the market will allocate are private goods or service. Private goods are goods in which consumption is rival and excludable in consumption.

Rival means consuming the good or service will deprive others of the same good. Excludable means it will not be feasible, costly, nor impractical from depriving others of the good. 2. There are no externalities involved in consuming or using the good or service. Externalities are third party effects on the good. For example, goods that pollute are assumed to have negative externalities. In contrast, health services are believe to have positive externalities because improvements in health benefits not only those who have purchased the good that enhances health but also third parties.

In a typical demand-supply curve, the demand curve represents society’s valuation for the good in terms of marginal utilities while the supply curve represents that part of the marginal cost-curve above the